1/02/2008 @ 6:00AM

China At The Crossroads

In a recent visit to China, I had a sense that the nation’s high-speed manufacturing machine was in need of a course change to avoid a very rough road ahead.

Built as a low-cost machine aimed at the OEM market, China is truly the world’s workshop. But the explosive growth has come at a high price. There are big environmental problems of factory pollution and energy shortages. There are quality control problems that are causing many customers to rethink China as a reliable supplier. There are “social responsibility” issues that have led the government to force entrepreneurs to pay higher wages. Managed growth and more controls are in the offing.

But here’s the difficulty. All these problems will only increase China’s manufacturing costs. That in turn will force manufacturers in China to shift production to lower cost areas in the country or move to places such as Vietnam. Since there is always someone out there that will do it for less, if you live by low cost alone, you will die by low cost.

China must consider taking what can be called the “branding highway.” This takes it to where it can start to build local and international brands that offer more than just low price. In other words, instead of making products for someone else, it makes them for itself. But this road also leads it into the land of intense competition.

Internationally, it will be competing with companies that have been winning for years in markets all around the world. If it makes a mistake, these companies will run right over it. Locally, it will be competing against many competitors that are only too willing to cut their price.

Consider the current China price war over automobiles. There are 19 brands that have less than 1% market share. This is a recipe for no profits.

Peter Drucker, the father of U.S. management consulting, once advised that only two business functions produce new customers. They are “marketing” and “innovation.” All other functions are expenses. This means Chinese companies have to learn about marketing. They will have to learn about “positioning” or how to win battles in the mind of a customer and prospect. They will have to learn about “marketing warfare” or how to cope with competition. They will have to learn about “differentiation” or how to figure out what makes you different from your competitors. But most of all, they have to understand that it’s not just about low price, but about added value or creating that reason as to why a product is worth a little more than competitive products.

Consider Tsingtao beer, a 104-year-old Chinese brand that will face more and more international brand competitors. What makes it different is the fact that the Germans built the original brewery. It is the “Chinese German beer,” which makes it very different and very good. After all, the whole world knows that German beer is the best. To compete, Tsingtao must make sure everyone knows its German heritage.

Many of those differentiating reasons are found in research and development, which brings me to “innovation.” In America, Silicon Valley is the hot bed of innovation or new ideas. In India you’ll find this kind of activity in Bangalore. Where is China’s Silicon Valley?

Innovation is all about a lot of smart people thinking of exciting new ideas. And these kinds of people like to work in an area that has other smart people thinking up new ideas. But all of this activity costs money. And if you sell your products as cheaply as possible you will have little left to invest in research and development much less the cost of marketing that’s needed to sell your new innovations.

Consider
Mindray Medical International
, a Chinese medical equipment manufacturer (see “Look Out, GE”). It has set aside a good chunk of its profits for research and development. It now exports ultrasound imaging and blood test equipment to 140 countries. Thats the road to success.

Some Chinese companies are buying established non-Chinese brands from different places around the world. This may be a good strategy but whats often available are not the winners but the also-ran brands that someone wants to unload. So they are faced with the task of how to turn a loser into a winner. This is no easy accomplishment for people not skilled in marketing.

Consider
Lenovo
, which bought the
IBM
PC brand and renamed it. It now faces
Hewlett-Packard
,
Dell
,
Apple
and ACER, which bought the
Gateway
brand. It will take a lot of innovation and marketing to succeed against that kind of competition.

Transitioning from a manufacturing to a market-driven economy will not be easy nor will it be quick. But it is a road that must be taken if China is to avoid what could be some very big potholes ahead.

With more than 40 years of experience in advertising and marketing, Jack Trout is the author of many marketing classics, including Positioning: The Battle For Your Mind, Marketing Warfare, The 22 Immutable Laws of Marketing, Differentiate or Die, Big Brands, Big Trouble and his latest, Trout on Strategy. He is president of marketing consultancy Trout & Partnersand has consulted for such companies as AT&T, IBM, Southwest Airlines, Merck, Procter & Gamble and others. Recognized as one of the world’s foremost marketing strategists, Trout is the originator of “positioning” and other important concepts in marketing strategy.